Misclassification of non-purchase items into COGS

Steps:

• Debiting $2050 to purchases incorrectly increases cost of goods sold (COGS) by$2050.
• This overstates COGS, reducing gross profit by $2050 (Gross Profit = Sales - COGS).
• Motor vehicle ($2000) should be capitalized as an asset, not expensed, so no income statement impact from it.
• Fuel ($50) should be debited to motor vehicle expenses, but isn't, leaving those expenses understated by$50.

Why D is correct:

• Per accrual accounting, misrecording fuel as COGS instead of expenses understates operating expenses by $50, while full$2050 in COGS understates gross profit via the formula Gross Profit = Sales - COGS.

Why the others are wrong:

• A: Reverses effects—gross profit is understated, not overstated; expenses not overstated.
• B: Gross profit is understated, not overstated; full $2050 affects COGS, not just$50.
• C: Gross profit understated by $2050 total, not just$2000 (includes fuel).

Final answer: D